How to take advantage of the favorable estate and gifting environment

Now is a great time to start making gifts from your estate or start planning to make those gifts before the end of the year. Provisions of The Tax Relief Act of 2010, set to expire at the end of 2012, increased the lifetime gift tax exemptions to $5.12 million for individuals and $10.24 million for married couples, while keeping the estate and gift tax rate at 35 percent. If no legislative action is taken before the end of the year, the lifetime exemption will drop to $1 million in 2013 and the tax rate will increase to 55 percent.

As a result, if you transfer $5.12 million in assets in 2012, you will pay no gift tax. If you wait and make that same transfer in 2013, the result would be a $2.266 million tax liability.

“That’s a significant increase,” says Kaz Unalan, CPA, director, tax and business advisory services at GBQ Partners LLC. “If you are considering transferring assets, do it this year before these tax provisions expire.”

Smart Business spoke with Unalan about how to take advantage of the tax cuts while there’s still time.

How does the economic environment play into estate planning?

Based on the current economic climate, many values are depressed. These lower values give you the opportunity to gift more at a lower cost. A prime example is real estate. Those values are creeping back, but they’re still much lower compared to values in 2007 and 2008.

Values of closely held businesses are no different. Because these are at historic lows, it is an ideal time to consider gifting a closely held business. In addition to low values, marketability and minority interest discounts could further enhance your gifting capacity. Currently, interest rates are also historically low and very favorable when gifting assets into a trust. Trusts are appealing gifting vehicles for retaining control of an asset while freezing its value. The interest rate is important in that the lower the interest rate the less the income interest is worth, and conversely, the more the remainder interest is worth. This is extremely beneficial for gifting strategies related to Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts.

When gifting nonmarketable assets such as real estate or interests in a closely held business you should have a professional appraisal or business valuation performed.

How does the future tax environment affect estate and gift tax opportunities?

There’s a lot of uncertainty going into 2013, which has to do with the political environment and the current administration’s budget proposal. Currently, there are valuation provisions in place that are favorable for taxpayers as they relate to the ability to discount valuations of family-controlled entities for gifting purposes. The proposed budget would eliminate those discounts. Part of the current budget proposal also includes restrictions on the use of GRATs. Those proposed restrictions would make GRATs less favorable as an estate planning tool. You need to work with your advisers — your CPA and legal team — to make sure you stay on top of these changes. Those are the best and biggest allies when you’re trying to find out more about these laws and changes and how it impacts you and your business. Those advisers know the rules and have a good understanding of your personal situation. That’s a key component to planning.

What are some strategies to take advantage of this favorable time?

A lot of it starts with looking at your business and family situation. Many considerations are made based on how your personal beliefs and your values align with the tax and legal aspects. You need to answer some big-picture questions such as what you want to leave your heirs, how you want to ensure the financial security of your family now and when you are gone, and who is ultimately going to receive your estate.

Start looking at those big-picture questions and then boil it down to a specific vision. It can then be as simple as making an outright gift and taking advantage of the increased exemption by transferring the gift by the end of the 2012. You can also look at it from a comprehensive planning perspective. Gifting can be part of a family-owned business strategy and include other elements of planning such as the use of trusts.

What are the benefits and risks of estate and gift planning?

The benefit is preserving your estate for your heirs. By doing that now, you take advantage of a tax environment that hasn’t been this favorable for a very long time. Being more efficient in your tax planning can also significantly add value and preserve more of your estate.

By not working with the right professionals you risk missing big opportunities. Beyond the opportunities, you want to make sure you are working with professionals who understand the tax laws and the compliance elements that go along with estate and gift planning. Failing to document and execute the plan is a risk that can be avoided with the right professionals. It’s important to fully understand all of the steps that are necessary for estate and gift planning in order to reduce any kind of risk you may have.

Kaz Unalan, CPA, is director, tax and business advisory services at GBQ Partners LLC. Reach him at (614) 947-5309 or [email protected]

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